We analyze the connections between the credit spreads that the same credit risk commands in different currencies. We show that the empirically observed differences in these credit spreads are mostly driven by the dependency between the default risk of the obligor and the exchange rate. In our model there are two different channels to capture this dependence: First, the diffusions driving FX and...

We consider counterparty risk for interest rate payoffs in presence of correlation between the default event and interest rates. The previous analysis of Brigo and Masetti (2006), assuming independence, is further extended to interest rate payoffs different from simple swap portfolios. A stochastic intensity model with possible jumps is adopted for the default event. We find that correlation be...

Default rate is a term frequently used in financial or economic circles to designate the percentage of borrowers of a given universe (for example, a specific bank portfolio) that have not or will not comply with their credit obligations. Based on past default data, expectations of future delinquency is one of the components that usually explains the level of bank spreads (see BCB, 1999). Also, ...

This paper presents a 3D model for pricing defaultable bonds with embedded call options. The pricing model incorporates three essential ingredients in the pricing of defaultable bonds: stochastic interest rate, stochastic default risk, and call provision. Both the stochastic interest rate and the stochastic default risk are modeled as a square-root diffusion process. The default risk process is...

This paper applies a macroeconomic-based model for estimating default probabilities on Dutch data. The …rst part of the paper focuses on the relation between macroeconomic variables and the default behaviour of Dutch …rms. A convincing relationship with GDP growth and oil price, and to a lesser extent, the interest and exchange rate exists. The second part assesses the default behaviour based o...

Measured default rates are currently at historically low levels. Compared to a historical average of 2%, Moody’s 12-month trailing corporate default rate was 0.50% in September 2007. Even more striking, the default rate had fallen since January 2007 whereas some measures of economic fundamentals had worsened over this period of time. For example, the equity implied volatility had more than doub...

A factor model for short-term probabilities of default and other corporate exits is proposed for generating default correlations while permitting missing data. The factor model can then be used to produce portfolio credit risk profiles (default-rate and portfolio-loss distributions) by complementing an existing credit portfolio aggregation method with a novel simulationconvolution algorithm. We...

We study a controlled corporate experiment in which loan officers was altered from fixed salary to volume-based pay. The incentives increased aggressiveness of origination: higher origination rates (+31%), loan sizes (+15%), and default rate (+28%). The effects are partly driven by moral hazard: approval decision is driven by loan officers’ discretion; however, default is uncorrelated with disc...

According to previous research, changing the default contribution rate for a 401(k) pension plan has a powerful effect on the distribution of contributions among relatively new employees. We study the welfare effects of such changes and identify the default rates that maximizes total surplus. Because one can rationalize certain types of default effects in conventional models with switching cost...